On January 3, 2019, Tropical Inc. leased a specialized piece of diagnostic equipme are as follows:

Cost to manufacture to Tropical $ 80,000

Normal sales price $100,000

Lease term 8 years

Economic Life 10 years

Residual value at the end of the lease term $20,000

Residual value at end of useful life $ 500

Lease payment (1st payment payable January 3, 2019) $16,881

Purchase option (exercisable at end of year 8) $ 2,000

Incremental borrowing rate of Bayview 12%

Rate implicit in the lease 10%

Assume that Tropical has reasonable assurance that Bayview will make the remaining lease payment. All costs of operating the leased equipment are borne by Bayview.

Prepare the journal entries for the Lessee and the Lessor for 2019 and 2020 below. Round to the nearest dollar.

Assume that Tropical has reasonable assurance that Bayview will make the remaining lease payments. All costs of operating the leased equipment are borne by Bayview. Assume that both companies have a December 31st year end.

Answer the following relative to the above information.

Criteria Assessment

1. Does the lessee have the option to purchase the asset at a price that is expected to be substantially lower than the fair value at the date the option becomes exercisable?

2. Is the lease term for the major part of the economic life of the asset even if title is not transferred?

3. Calculate the present value of the lease (use four decimal places for your calculations and round your answer to the nearest dollar)

4. At the inception of the lease, does the present value of the minimum lease payments amounts to at least substantially all (greater than 90%) of the fair value of the leased asset?

From the perspective of the lessor, what kind of lease is the above?